Investment market update, Q2 2025-26

In this episode of ESSSuper's Exploring Super podcast, Martin Thompson, an Investment Manager at ESSSuper, provides economic and market commentary for the October to December Quarter 2025 period, plus some more up to date commentary.

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This investment commentary does not constitute advice.

Before acting on any advice contained in this article, podcast or video, please download and read the relevant Product Disclosure Statement and target market determination, found on our PDS and handbooks web page. The Board recommends that you seek financial advice before acting upon this information.

Investment returns cannot be guaranteed as investment markets can be volatile. As a consequence, returns can be positive or negative. Past investment performance is not a reliable indicator of future performance.

Benefits in ESSSuper’s Accumulation Plan, Income Streams and Beneficiary Account products are not guaranteed or underwritten by the Victorian Government or ESSSuper, and ESSSuper does not come under the jurisdiction of the Australian Financial Complaints Authority (AFCA). ESSSuper comes under the jurisdiction of the Victorian Civil and Administrative Tribunal (VCAT).

SuperRatings is a third-party superannuation research company providing data analysis, information, and commentary to both the public and the superannuation industry. Established in 2002, it is the most widely used and accepted ratings firm in the superannuation industry. Refer to superratings.com.au and our Ratings and awards webpage for more information. Ratings are only one factor to be taken into account when choosing a super fund. 

Transcript

00:00:02 

You're listening to Exploring Super, the exclusive podcast for ESS Super members. 

00:00:10 

Welcome to Exploring Super, the exclusive podcast for ESS Super members. 

00:00:16 

I'm Felicity Brasher, Group Executive for Member Engagement, and today I'm joined by Martin Thompson, one of our fabulous investment managers here at ESS Super. 

00:00:26 

Welcome, Martin. 

00:00:27 

Thanks, Felicity. 

00:00:28 

So, Martin, what are some of the key movements we've seen in the investment markets in the December 2025 quarter? 

00:00:37 

The main feature of the quarter was continuing strength in global share markets, despite a fair bit of volatility over the year from tariffs and other 

00:00:46 

things. 

00:00:47 

Global share market was strong over the whole year, and the last quarter was certainly no exception to that. 

00:00:52 

What was a bit different was that the performance we saw was more broadly based than what we saw earlier in the year. 

00:00:59 

And what I mean by that is that several regions outperformed the United States, such as Europe and Japan, which was a bit different than earlier. 

00:01:06 

There was also a bit of a shift in terms of which sectors drove the performance. 

00:01:11 

As sectors that were weaker earlier in the year, such as healthcare, performed a bit better 

00:01:16 

in the last quarter. 

00:01:17 

Right. 

00:01:17 

Australia was a bit different though. 

00:01:19 

Its share market was actually down. 

00:01:20 

And what was interesting was that materials performed really, really strongly over that quarter, but a whole bunch of other things weren't so strong and that dragged the whole market down. 

00:01:32 

That included, you know, particular companies like CSL that was a notable underperformer. 

00:01:37 

Yeah. 

00:01:37 

But it was, CSL certainly wasn't alone. 

00:01:39 

There were several other companies that didn't perform particularly well as well. 

00:01:43 

Right. 

00:01:43 

Australian bond markets were also down over the quarter. 

00:01:46 

A key contributor to this was the Reserve Bank of Australia revising up its inflation expectations in November. 

00:01:53 

And bond markets reacted with an increase in its expectation of interest rates. 

00:01:57 

which is in turn negative for bonds. 

00:02:00 

And other notable shifts were the upwards moves in metal prices. 

00:02:04 

everyone knows about gold, but silver was particularly notable over the quarter. 

00:02:08 

Martin, the friction over the tariffs between the US and Europe and the Greenland dispute has unsettled financial markets. 

00:02:17 

Have these developments had any observable impact on equities or on currency movements during the last part of 2025 through to today? 

00:02:27 

It's fairly difficult to attribute financial market behavior to any specific events. 

00:02:33 

But it does appear that it's possible that the weakening of the US dollar is in part due to the behavior of the US administration over the last year, including more recently. 

00:02:44 

And this includes things like the imposition of tariffs that they started 

00:02:47 

started sort of early last year, but also in 2026, a lot of talk around Greenland and even to today, they're talking about various other things. 

00:02:56 

All of this potentially creates less confidence in the US government and also more uncertainty in markets. 

00:03:03 

And when there's, you know, uncertainty, capital flows are affected. 

00:03:06 

So, you know, it's possible that flows that otherwise would have gone to the US have now been directed elsewhere, which then has flow on effects to the US dollar. 

00:03:14 

And 

00:03:15 

The US dollar certainly fell a fair bit over the last year against a whole bunch of other currencies, and it fell further early this year. 

00:03:23 

It's harder to attribute any particular impact of this US behaviour on global equity markets, but it is possible that this has been a factor behind the stronger equity market performance we've seen outside of the US over the past month or so, but this is only really one factor. 

00:03:36 

Right. 

00:03:37 

Martin, I have asked this question previously, but I'll ask it again. 

00:03:43 

We've seen tech stocks surge again. 

00:03:46 

Do you think we are seeing signs of an AI driven bubble or do you think we're witnessing sustainable momentum? 

00:03:53 

There's no doubt that the AI theme has been a key driver of market performance for years now and it continues to be a key driver. 

00:04:01 

The stronger, longer term performance and the dominance of what we call the Magnificent Seven stock certainly reflects this dynamic. 

00:04:09 

But in reality, we'll only really know if this is a bubble or not in hindsight. 

00:04:13 

Yeah. 

00:04:14 

There's little doubt that what we are calling AI at the moment and its applications will have very substantial impacts on numerous sectors and companies. 

00:04:24 

And some companies will be winners and others will be losers. 

00:04:28 

Yeah. 

00:04:28 

But the real question is just which category each company falls into. 

00:04:32 

Yeah. 

00:04:32 

And this has certainly been an important driver of what we've seen sort of over the last month or so, where the markets have gotten quite volatile and it appears to be largely driven by 

00:04:43 

the market trying to tackle this particular question. 

00:04:46 

We've seen investors reassessing which companies they think will benefit or suffer from the AI boom, and that's led to a lot of market volatility. 

00:04:54 

I'll also note that while the stocks exposed to the AI theme, such as the Magnificent Seven, have performed strongly over recent years, towards the end of last year, the last quarter, they certainly did slow a fair bit relative to the broader market, and there has been a fair bit of 

00:05:11 

differential performance between the stocks in that group, which may suggest that the market is becoming a little bit more selective rather than perhaps a bit more hyped about the AI theme. 

00:05:19 

Right, yeah. 

00:05:20 

These sorts of dynamics are part of the reason why we have active management in our portfolio, because the managers can take account of these sorts of themes and invest accordingly. 

00:05:30 

Thinking about Australia, Martin, our dollar seems to have been performing well against the US dollar at the moment. 

00:05:36 

Is that having any effect on our investments? 

00:05:39 

The Australian dollar has certainly 

00:05:41 

strengthened versus the US dollar over last year, and particularly in the last month or so. 

00:05:46 

Partially, this is in relation to what I talked about earlier, which is the possible decrease in confidence in the US, which has led to a depreciation in its currency. 

00:05:56 

which in turn means the Australian currency, relatively speaking, is stronger. 

00:06:01 

But another factor that has probably been driving this has been the expectations of increasing interest rates. 

00:06:07 

You know, I talked about earlier about the RBA having increased inflation expectations and indeed recently they actually put up their policy rate. 

00:06:14 

Yeah. 

00:06:15 

The reason why this matters is because interest rates between countries are one of the key factors behind exchange rates, which at least, you know, likely explains at least some of the appreciation we've seen in the Aussie dollar. 

00:06:25 

But getting to the 

00:06:26 

effects on investments, the direct effect is that it means existing assets denominated in US dollars are worth less in Australian dollars. 

00:06:35 

But then it also means that future dollar investments that we make will cost us relatively less. 

00:06:40 

And complicating it even further, we actually hedge a proportion of our foreign currency exposure, which offsets some of this movement. 

00:06:48 

The actual currency exposure we have by option varies, 

00:06:51 

and we aim to have these exposures to be similar to other equivalent superannuation fund options. 

00:06:57 

The indirect effects of all of this are more complicated. 

00:07:01 

For example, rising interest rates are arguably an indicator of a stronger economy, which may be positive for domestic equity assets, but will also be negative for bonds. 

00:07:09 

Okay. 

00:07:10 

Martin, you just mentioned interest rates and we've seen a cycle of interest rates being either cut or held, but recently they went up for the first time since November 2023. 

00:07:21 

How do you think 

00:07:21 

this will affect superannuation. 

00:07:24 

The answer is it depends. 

00:07:26 

Okay. 

00:07:26 

Bonds are the clearest example. 

00:07:28 

Interest rate rises or expectations of interest rate rises are negative for bonds performance. 

00:07:34 

However, after this, the yield on the bonds will also be a little bit higher, which means on an ongoing basis, they perform a little bit better in the future. 

00:07:42 

Cash, on the other hand, pretty much doesn't get impacted at all, except that then it will continue to perform better on an ongoing basis. 

00:07:50 

And all the other assets are somewhere in between these two. 

00:07:53 

Right. 

00:07:54 

Generally in isolation, rising rates are a negative for risk assets. 

00:07:59 

But if the rises are due to a solid economy, for example, then the positive effects on revenue that flow through to some companies might actually partially offset this or actually overwhelm it, meaning it's actually positive. 

00:08:12 

So like I say, it depends. 

00:08:14 

Right, okay. 

00:08:15 

So we'll hedge our bets on that one. 

00:08:17 

Martin, let's have a little think about EWSC. 

00:08:20 

Super's investments. 

00:08:22 

Overall, how would you say our investments have performed against their objectives during 2025? 

00:08:28 

So I'm pleased to say that all of our options have outperformed their CPI linked investment objectives over the one year and three-year periods through the end of December. 

00:08:37 

As well as these inflation linked objectives and other comparison point is how our options compare versus a survey of super fund performance as compiled by Super Ratings. 

00:08:46 

Longer term performance relative to Super Ratings remains strong with six of 

00:08:50 

of our nine investment options generating first or second quartile returns over five years to December. 

00:08:57 

So 4 of the 10 investment options had peer relative returns above the median average for the year ending December 2025. 

00:09:04 

What held us back a bit there was the performance of the fund's active equities managers. 

00:09:10 

It's been a difficult environment for active management, with markets led by a fairly narrow group of stocks, but we expect this to reverse over time, which should be more positive for these strategies. 

00:09:19 

For the last quarter of 2025 though, Balanced Growth Managed, which is our default option for accumulation plan and beneficiary account, performed particularly well versus peers, performing in the top quartile, largely due to strong active equities performance. 

00:09:33 

It's worth noting that our balanced growth option has performed in the top quartile of the Super Ratings Balanced Survey over the past one and three-year periods and is the number one performer in this survey over five and seven years. 

00:09:44 

Wow. 

00:09:45 

Balanced growth is similar to our default balanced growth managed option, except it only invests in listed equities via passive strategies, in contrast to the active strategies that the balanced growth managed option can invest in. 

00:09:58 

Right. 

00:09:59 

Martin, thank you so much for coming in today and sharing your insights. 

00:10:02 

We look forward to having you on again. 

00:10:04 

Thank you for having me on, Felicity. 

00:10:06 

That wraps up our episode today of Exploring Super, the exclusive podcast for ESS Super members. 

00:10:12 

We look forward to producing more content for you at ESS Super, proudly serving our members. 

00:10:18 

If you'd like more information about our investments and products, please go to esssuper.com.au. 

00:10:28 

This podcast is of a general nature only and does not consider your personal circumstances, financial needs or objectives. 

00:10:36 

Before acting on any advice contained in this podcast, please download and read the relevant product disclosure statement and target market determination found on our website, esssuper.com.au. 

00:10:50 

Investment returns cannot be guaranteed. 

00:10:52 

Past performance is not indicative of future performance. 

00:10:56 

Super Ratings is a third-party superannuation research company, providing data analysis, information and commentary on both the public and the superannuation industry. 

00:11:06 

Refer to superratings.com.au for more information.